3 key misconceptions hold UK SMEs back at a time of unprecedented pressure

23 February 2023

UK businesses are facing a perfect storm as costs soar and growth stalls. But there are transformative answers for smaller businesses – just not ones they typically consider. Instead of trying to recruit your way to growth, it’s time to focus on productivity. 2023 must be the year of efficiency and software may have the answer.

As a painful, self-reinforcing mix of pressures intensifies, 2023 is set to be an extremely challenging year for UK SMEs. Sage’s Digital Britain report describes a list of the top barriers facing small/medium businesses. Number one is increases in prices and wages, mentioned by 66% of participants. The second is shortage of labour, cited by 51% of participants. These pressures are exacerbating each other.

The dramatic increase in energy prices and raw materials is driving up costs not only for businesses but also for households. This then creates other pressures: as the cost of living rises, so does the demand to increase wages to support household incomes. 

UK job vacancies reached a record high of 1.3 million in 2022, according to ONS figures, revealing just how hard it is to recruit right now. This is a significant problem in itself but also puts a further upward pressure on salaries. Businesses compete to recruit scarce staff by raising salary offers – once more increasing costs. 

The focus for many businesses in 2023 clearly has to be on controlling costs. But how can you control costs without shrinking your business?

The answer is to improve efficiency: do the same with less. Or – ideally – do more with the same.

The productivity problem

Unfortunately, improving efficiency is not something UK businesses are good at. The UK suffers from below average productivity and, as the National Institute of Economic and Social Research noted in its September 2022 report, has been particularly poor since the 2008-09 financial crisis. Between 1974 and 2008 UK productivity grew at an average of 2.3% a year, yet between 2008 and 2020 productivity growth dropped to an anaemic 0.5%, underperforming most comparable economies.

This makes the challenge even more urgent, but it does at least suggest that there are considerable opportunities here to drive productivity up. But how? The answer is staring UK businesses in the face yet they are blinded by three key misconceptions, which we see time and again in our work with UK SMEs. 

Misconception 1: recruitment is the way to grow

The first misconception is the idea that recruiting staff is the main way to achieve growth. SMEs typically approach expansion in this way. The flip side of this is the idea that capital investment isn’t something small businesses can afford. The apparently easier route is to get an extra couple of people on board. The cost is met monthly and it’s a reversible decision so it seems less risky. 

Often recruiting is used to solve problems and inefficiencies that reveal themselves as a business grows. For example if a small business starts using spreadsheets to record orders this may be easily manageable with the existing headcount. But as the business grows the complexity of managing spreadsheets grows exponentially, to the point where a person needs to be recruited simply to manage the process of filing orders. You can solve inefficiencies like these by throwing people at them. At least when people are cheap and readily available. Recruiting is often done for other wrong reasons – even simply because the more people employed, the more successful the business appears. 

But is recruiting actually low risk? For a start there’s the annual financial cost, as well as the investment of time and money in the recruitment process itself. When you consider the senior people involved, the cost can easily reach five figures. In the first few months new recruits require training and integrating, which is also costly. The risk is whether the person you recruit will give a decent return on the investment you make in them. That’s not a given. Furthermore, a new employee who looked great at interview can turn out to be toxic in the workplace, leading to a long series of problems and fears of problems. 

Recruiting should be seen as an investment, and there are other ways of investing in a business, ones which may offer greater ROI. What’s more, an employee is an ongoing financial cost whereas a capital investment is a one-off cost with ongoing benefits. 

As employees become more expensive and harder to get hold of, recruitment becomes riskier still. The costs are higher and the chances of getting a person who gives a good ROI are lower as the available pool is smaller. 

Misconception 2: software is a cost not an investment

The second key misconception is viewing software as a cost not an investment. When something is seen as a cost the response is to minimise spending on it. As a result SMEs typically end up relying on poorly fitting and outdated IT systems. 98% of UK SMEs still use spreadsheets for mission-critical operations, according to Gridfox’s state of technology in SMEs study – a frankly shocking statistic that shines a small light on the UK’s productivity problem. 

One issue is that off-the-shelf software systems tend to be hard to customise and – an opposite problem – are equipped with large amounts of unnecessary and unhelpful functionality. Business software that is a poor fit requires staff to compromise their performance and add costly workarounds. 

The problem is compounded by the use of systems that don’t talk to each other, leading to repeat data entry (and a raised risk of error). For example, a sales team may use paper forms filled in while on client visits. These are later typed in by someone else and entered into a spreadsheet. Later still, when a sale goes though, the same customer details are entered into a separate order management system. Finally the same details are entered by the accounts team into a package like Xero. Many of these systems may can be excellent in themselves, but the risks and inefficiencies occur when they are disconnected from each other. 

If a new recruit can be seen as an investment in the future, then money spent on better fitting, better connected software is an investment too. 

Viewing capital investment in terms of salaries can be a useful tool. When software is viewed through this lens its cost can be seen more readily as an investment. A system that costs £70,000 might sound like an enormous cost. But when it’s seen as the equivalent of two salaries it comes into focus. And when it is understood as two salaries for a year only, with a return on investment that continues for years to come, it can be seen as the long term investment it truly is. Ultimately a business should aspire to view their software system as their best performing member of staff. 

Misconception 3: we can’t afford a tailored business system

This is often the big misconception, the nail in the coffin of investment in time-saving, productivity-driving software. Even if a chief executive is convinced that there are ways of investing apart from recruiting new staff, even if they agree that software counts as an investment, they will typically assume that bespoke enterprise software is simply unaffordable for an SME. 

The common assumption is that there’s very little available between spreadsheets and SAP or Salesforce. Solutions like SAP are built for large enterprises and are indeed very expensive – and the cost is ongoing. They are also offer enormous functionality, most of it not needed, and take great effort to set up. They may not even provide the bespoke solutions that so many SMEs require. They represent a very large investment that may well not deliver the ROI that is the very focus of the initiative. 

However, the fact is that business software – and bespoke business software – is more achievable than most SMEs imagine. In fact Gridfox found that 27% of SMEs already use custom built or bespoke software. 

A system that operates across the entire workflow of a medium-sized business might cost no more than two or three salaries, to use that simple, meaningful measure. Is that unaffordable for a small or medium sized business? If recruiting new staff is affordable, a bespoke business system is too. 

No longer a nice-to-have 

A properly functioning core business system that works across a business is no longer a nice-to-have. It wasn’t a nice-to-have before the current pressures hit, but now it has become an essential for any business that wants to survive, let alone grow. 

Let’s briefly consider the benefits available. First, a business system offers direct savings. These are immediate wins, as those costly workarounds are discarded. Something as basic as repeat data entry is eliminated at a stroke. It’s a classic example of ‘spend to save’ – and the savings aren’t one-off but ongoing.  

This points to the next benefit. Business software drives out costly errors. Repeat data entry is an obvious example, but consider errors in order fulfilment which mean customers fail to receive what they asked for. These kinds of mistakes can be far more costly, both in financial terms (correcting the error) but also in reputational damage. At a time when the price of supply chains is high, businesses can even less afford to make these kinds of mistakes. 

Another benefit is cyber security. Think for example of the risks of storing business-critical data in a spreadsheet which is then repeatedly emailed between team members. Even worse, the risk of an employee taking the client list or other critical data with them when they leave to join a competitor.

A further benefit of a well-fitting system is less obvious – it makes work easier and more enjoyable for staff. Those costly workarounds can be draining, infuriating and a direct cause of staff turnover. A system designed for how you work makes individuals feel valued. In the current environment, retaining motivated staff is critical. 

Finally, a bespoke system can help businesses achieve their aspirations. It’s possible to grow without recruiting because the new system effectively does the work of one or more people, and you’re getting better value from your wage bill. A good system also gives better visibility of key business data to support decision-making (eg an accurate understanding of what a product costs to produce) and to drive further efficiencies. This makes it possible to expand into new markets without having to increase headcount. 

Put simply, for many SMEs a well-fitting business system is the most direct means available to drive efficiency and build productivity. It has both immediate and cumulative benefits. It permanently improves efficiencies and cuts costs. Above all, it offers a way for small and medium businesses not only to survive current pressures but to grow – without having to recruit. 

Sage’s Digital Britain report estimates that enabling SMEs to use more tech could unlock an extraordinary £232 billion extra per year. The potential is huge. 

Find a solution specific to your needs 

It’s important that a business system is adapted to the needs of an individual business, otherwise the benefits above may not be available. But as we’ve seen, bespoke systems are now within the reach of SMEs. This simply wasn’t true 10 years ago. 

At Decent Group we see businesses grappling with the challenges outlined in this piece all the time, and we have become experts in understanding these problems. We have also witnessed time and again how businesses can be transformed when they invest in powerful, well-fitting solutions.

How efficient is your business?

Decent Group has created a business systems self-audit to help SMEs evaluate their efficiency and identify the potential for software-driven improvements. This DIY document is available free of charge.

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